YOUR COMPANY IS LOOKING FOR WORKING CAPITAL!
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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Working Capital Financing In Canada. When business owners and financial managers think of 'cash flow ' two terms are almost synonymous, factoring, and working capital. Is there a difference? Yes, a major difference.
PERMANENT WORKING CAPITAL VERSUS SHORT TERM FINANCING FOR DAILY OPERATIONS
We believe that when Canadian businesses think in terms of working capital that is often in the context of permanent working capital. This can be in a couple of forms, a term loan, a mezzanine loan, or subordinate debt. These are the key terms of 'high finance' for working capital loans! With loans such as these businesses typically use the working capital derived from the loan to invest in sales and marketing, implement new products and strategies, and purchase inventory and materials for further corporate growth.
THE WORKING CAPITAL ' LOAN ' OPTIONS
There are numerous advantages to a working capital term loan. Repayment of the loan is typically in the 5 -7 year range. As such that clearly frees up cash flow. Let's do a quick example - If a Canadian business borrowed $ 150,000.00 and was successful in getting a term loan in place the monthly payments over a 5 year period would be approximately $ 3000.00 per month. (We used an interest rate of 8% just as an example).
Depending on the flexibility of the lender payments can be structured, or even potentially deferred, based on the nature of the customer's needs and overall financial situation.
Naturally, any financing scenario as positioned above is long term permanent working capital, which is generally viewed positively by business owners and their lenders. It is in effect a form of 'patient working capital '.
WORKING CAPITAL LOANS SUPPLEMENT YOUR OTHER SECURED CREDITOR RELATIONSHIPS
Long term working capital loans in effect 'complement 'your existing secured creditor relationships. For the purposes of this article we won't dwell too much on the aforementioned subordinated debt and mezzanine debt - we will simply say they are unsecured ' cash flow ' loans, long term in nature, with rates substantially higher than chartered bank rates due to the general unsecured nature of the loans. The lender is simply taking a position that your firm will be able, based on historical and present financials, to repay the loan out of cash flows.
ENTER THE ' FACTORING ' SOLUTION!
We've discussed the 'permanent ' working capital loan and have seen its characteristics, i.e. term loans, longer repayment schedules, fixed rates, terms and structures. Now let’s look at totally immediate working capital/ cash flow, which many customers in Canada are achieving by a factoring or working capital cash flow facility.
ACCESSING FUNDING IMMEDIATELY!
The invoice factoring solution is immediate. Transactions and facilities can usually be approved in a much shorter timeframe. Every customer is different of course, and in many different industries, but based on a review of your financials and your overall business model customers receive immediate significant advances (typically 90%) of their invoices.
IT'S ALL ABOUT YOUR ACCOUNTS RECEIVABLE
Since the heart of any business cash inflow comes from collected receivables businesses who 'struggle' with the collection process often face cash flow shortages due to slow-paying customers. Conversely, as receivables and inventory build-up for good reasons (good reasons = more sales) the companies investment in receivables and inventory grows.
KEY ELEMENTS OF FACTORING AGREEMENTS
Factoring, or receivable discounting as it is also known, is based on the overall size, quality, and collection experience related to your billings. It is very safe to say that current invoices are more easily factored (sold) than 65-day unpaid invoices from slower paying customers. However, in general, any billed sales under 90 days old are financeable under this method.
HOW DOES TRADITIONAL FACTORING WORK
Many factoring company firms assume the role of your collection department, some business owners actually welcome this as they have in fact utilized the very popular concept of 'outsourcing' re their collections as outsourcing, previously unheard of years ago, is now a way of doing business.
So is factoring all goodness. Certainly not, what type of financing is. In factoring, there is a higher cost to finance your A/R portfolio. In Canada, there are tens and hundreds of nuances and administrative procedures around the factoring process that many business owners struggle with. Factoring should be used for growth, not survival, and other strategies can be explored at a lesser cost and less intrusiveness to your business.
THE BEST FACTORING SOLUTION - SPOILER ALERT - IT'S ' CONFIDENTIAL'
Oh, and if you’re looking for the ultimate A/R finance solution you should consider our recommendation of Confidential A/R finance, allowing you to bill and collect your own receivables without any other paperwork intrusion. The application process in all factoring services makes it easy to get started and approvals are typically very fast.
CONCLUSION
In summary, small business owners considering the ' working capital/cash flow ' conundrum can consider long term loans or short term receivable financing strategies for growth. There are a number of options around both of those financing, and in fact, other options (example: a sale/leaseback of your assets or a real operating margined facility with a Canadian chartered bank) should also be potentially explored.
Review all options and work with a trusted, credible and experienced Canadian business financing advisor with a track record of success.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
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